Federal Comparison
Property taxation is governed by Wisconsin's constitution and statutes, as such there are no current or pending federal regulations regarding agricultural assessment.
State Comparisons
The valuation of agricultural land in Illinois, Michigan and Minnesota are specified by statute; therefore, there are no administrative rules related to agricultural valuation in these states. The Iowa administrative rule related to agricultural valuation provides no detail regarding the formula used to calculate agricultural land value; reference is made to the Iowa real property appraisal manual.
Summary of factual data and analytical methodologies
The proposed rule order specifies a landlord-tenant crop-share appraisal method to estimate the rental income of agricultural land. Under a crop-share lease agreement, a landowner provides the land and assumes the property tax expenses for the land. A farm operator provides the machinery, fuel, and labor. The landowner and farm operator share the direct operating expenses, including the seed, fertilizer, and pesticides or chemicals. Income from the harvested crop is also shared on the same basis as the direct operating costs. The proposed rule provides for an equal distribution of income and cost among the landowner and farm operator, which is reflective of a common crop-share lease.
Gross income, cost of production, and net income are determined based upon the following.
• Gross income is determined by multiplying the 5-year average corn yield by the 5-year average market price of corn. The result is reduced by 50% in order to determine the landowner's income under a crop-share lease.
• Cost of production is determined by multiplying the 5-year average direct operating costs of corn production by the 5-year average corn yield. The result is reduced by 50% in order to determine the landowner's costs under a crop-share lease.
• The landowner also incurs a management expense that captures the cost of maintaining and administering the operation. Management expense is 7.5% of the landowner's gross income.
• Net income is calculated by subtracting management expenses and direct operating expenses from gross income. Dividing net income by the capitalization rate provides the estimated value of agricultural land.
• Property taxes, which are a landowner responsibility, are realized in the capitalization rate.
• With the exception of the capitalization rate's municipal tax rate, all data is averaged over a 5-year period.
Fiscal Estimate
The proposed rule amending Chapter
Tax 18 would have the effect on 2006 and later assessments of agricultural land.
Under the current permanent rule, the 2006 use value of agricultural land would be based on the 5-year average corn price, cost, and yield for the 1999-2003 period, and the capitalization rate would be based on the 5-year average interest rate for the 2001-2005 period. Using the data for these periods, it is estimated that agricultural land values would be negative. It is unclear how property with negative values would be taxed.
To avoid negative values for agricultural land, the Department of Revenue issued emergency rules to hold agricultural land values at 2003 levels in both 2004 and 2005.
Under the proposed permanent rule, the 2006 and later use values would be based on income capability from agricultural land using a crop share lease approach. Under a crop share lease, a landowner and a farm operator share the cost of growing a crop. The common split in such agreement is 50-50, where the landowner and farm operator equally share the harvested grain and input expenses. The proposed rule specifies the process of determining gross income, cost of production, and net income. Also, the proposed rule specifies a capitalization rate as a 1-year adjustable rate mortgage for farmland plus the net tax rate in the municipality from all taxing jurisdictions or 11%, whichever is greater.
Under the proposed permanent rule, the annual change of agricultural land value per acre would be limited to the percentage change in equalized value of real and personal property statewide, less new construction and agricultural land. From 2003 to 2004 the statewide equalized value (less new construction and agricultural land) increased by 6%. Assuming the same growth in equalized value from 2004 to 2005, assessed values per acre for each type of soil would only increase by 6% from current values. As a result, statewide agricultural land values will approximately equal $2.1 billion in 2006. Since growth of agricultural land value will be limited to the statewide change in equalized value excluding new construction and agricultural land itself, agricultural land as a share of total equalized value will decrease.
An average 200 acre farm can be an illustration of the fiscal effect on farmland property taxes. For example, under the current permanent and emergency rules, an acre of grade 1 soil in Dodge County was assessed and then frozen at $261 per acre. Assuming an average Dodge County tax rate of $21.48 per $1,000 of assessed value, property taxes levied on a 200 acre farmland in 2005 were about $1,120 ($261 x 200 x 0.02148). Under the proposed permanent rule, a grade 1 soil would be assessed at $276 ($261 x 1.06) per acre. Because agricultural land value growth will be smaller than the growth of total equalized value, property tax on agricultural land as a percent of total levies is expected to decrease statewide. Property tax changes will vary by municipality, however, based on local decisions and changes in state aid.
Under the proposed rule, there will be no loss of state forestry tax revenue. To the extent that the current permanent rule would result in negative values for agricultural land and therefore a loss of state forestry tax revenue, the proposed rule would result in an increase of $413,000 in state forestry tax revenues ($2.1 billion x .0002).
Relative to the valuation of agricultural land under the emergency rules that were adopted to avoid negative values, however, the proposed rule will result in a forestry tax revenue increase of about $23,000.
Effect on Small Business
This proposed rule order does not have a significant effect on small business.
Text of Rule
SECTION 1. Tax 18.07 (1) (b) 1., 2., 3., are amended to read:
Tax 18.07 (1) (b) Net rental income per acre. 1. Beginning in 1997 2006 and in each year thereafter, net rental income per acre for each category of agricultural land in each municipality shall be calculated according to the income attributable to a landowner under a crop-share lease. The department shall assume a lease agreement where the income and direct operating costs are distributed equally between the landowner and farm operator. The department shall adhere to professionally accepted appraisal practices in determining gross income, cost of production, and net income that are attributable to a landowner under a crop-share lease. Net income shall be calculated by subtracting average total cost of production per acre under subd. 3. from average gross income per acre under subd. 2.
2. Beginning in 1997 2006 and in each year thereafter, the landowner's average gross income per acre for each category of agricultural land in each municipality shall be calculated by multiplying the category's 5-year average corn yield per acre, adjusted for the typical productivity of that category, by the 5-year average corn market price per unit of output.
The product shall be reduced by 50% to reflect a crop-share lease with equal distribution of income. Yield per acre shall be based on the federal soil conservation natural resource conservation service's soil productivity indices and corn market price data shall be obtained from the Wisconsin department of agriculture, trade and consumer protection. If the federal soil conservation natural resource conservation service and the Wisconsin department of agriculture, trade and consumer protection are unable to provide, or to provide timely, soil productivity indices and corn market price data, respectively, comparable data shall be obtained from other generally acceptable sources.
3. Beginning in 1997 2006 and in each year thereafter, the landowner's average total cost of production per acre for each category of agricultural land shall be calculated by multiplying the category's 5-year average corn yield per acre, adjusted for the typical productivity of that category, by the 5-year average cost of corn production. calculated from farm expense information obtained from the Wisconsin department of agriculture, trade and consumer protection, the university of Wisconsin, federal agencies, or farm credit services associations. In calculating the 5-year average cost of corn production, the department shall include the direct operating costs incurred by the landowner under a crop-share lease, which shall include the cost of seed, fertilizer, lime, manure, chemicals, commercial drying, interest on operating capital, or their equivalent. The total cost of corn production is reduced by 50% to reflect a crop-share lease with equal distribution of direct operating costs. The 5-year average cost of corn production shall not include those costs incurred by a farm operator under a crop-share lease, which includes labor, opportunity cost of unpaid labor, machinery, fuel, repairs, overhead, or their equivalent. An additional landowner cost for operational management, equal to 7.5% of the average gross income determined in subd 2., shall be subtracted from the average gross income calculation in subd. 2. Property taxes are not a farm expense for purposes of calculating average total cost of production per acre. Yield per acre shall be based on the federal soil conservation natural resource conservation service's soil productivity indices and cost of corn production data shall be obtained from the Wisconsin department of agriculture, trade and consumer protection. If the federal soil conservation natural resource conservation service and the Wisconsin department of agriculture, trade and consumer protection are unable to provide, or to provide timely, soil productivity indices and cost of corn production data, respectively, comparable data shall be obtained from other generally acceptable sources.
SECTION 2. Tax 18.07 (1) (b) 4., 5., 6., and 7. are repealed.
SECTION 3. Tax 18.07 (1) (c) 5. is amended to read:
Tax 18.07 (1) (c) 5. The capitalization rate for each municipality for each assessment year shall be 11% or calculated by adding the sum of the statewide 5-year moving average rate for the year prior to the assessment year and to the net tax rate of that municipality for the property tax levy 2 years prior to the assessment year, whichever is greater.
SECTION 4. Tax 18.07 (1) (c) 6. and 7. are repealed.
SECTION 5. Tax 18.07(1) (d) 1. and 2. are created to read:
Tax 18.07 (1) (d) 1. Beginning in 2006 and in each year thereafter, increases and decreases in the use values for each category of agricultural land in each municipality shall be limited to the prior year's percentage change in the statewide equalized value. When determining the percentage change in the statewide equalized value, the department shall exclude the value of agricultural land and new construction. New construction shall include increases in land value due to higher land use, new subdivisions, and increases in improvement value due to new construction, completion of improvements partially assessed, remodeling and additions, and land improvements such as addition of curb, gutter, sewer, water, or their equivalent. The amount of new construction shall be reduced by the loss of land utility and loss of property value due to full or partial destruction, removal, contamination, or their equivalent.
2. The department shall calculate the percentage change from the previous year's use-values to the current year's use-values according to the formula in 18.07(1)(b). Increases and decreases in the use values for each category of agricultural land in each municipality shall be limited to the percentage change determined in subd 1. If the increase or decrease is less than the percentage change determined in subd. 1, the use value per acre will equal the value calculated by the department according to the formula in 18.07(1)(b).
SECTION 6. Tax 18.07 (3) (a) is amended to read:
Tax 18.07 (3) (a) The assessor shall determine the use value of each parcel of agricultural land based on the use value per acre for that category of agricultural land in that municipality provided by the department, adjusted by the assessor to reflect more accurately the use value of that parcel of agricultural land.
